TAA Financial Ratings Methodology - March 2013
New from The Airline Analyst TAA Financial Ratings
Introduction
Many of our clients and prospects have asked us to provide
financial ratings, using the data available in The Airline Analyst.
We are now pleased to respond with the launch of TAA Financial
Ratings. TAA Financial Ratings are available on a stand-alone basis
as a separate subscription or in conjunction with a subscription to
The Airline Analyst. They will be updated four times a year as
updated airline financial data becomes available. Please see
Appendix 1 for a description of what is included in the product.
What are TAA Financial Ratings?
TAA Financial Ratings are ratings of intrinsic financial strength,
based on a single quantitative score for each airline based on
average fleet ages and four key financial ratios.
What can TAA Financial Ratings be used for?
TAA Financial Ratings can be used to help benchmark or sensecheck existing systems or ratings that you have or to help predict
Credit Ratings. Their particular strength is that they are available
for more than 120 airlines and can be used for comparative
analysis of this large airline population. TAA Financial Ratings are
not intended to be predictors of financial default or bankruptcy
but can be used as indicators of absolute and relative financial
strength or weakness. They can also be used to ascertain the
ratings trend for individual airlines.
What are TAA Financial Ratings not?
They are not Credit Ratings. Credit Ratings are forward looking
while TAA Financial Ratings are based on historic data and ratios.
Credit Ratings also take into account such factors as ownership,
strategy, management, labour relations, market position,
government relations, sovereign ceilings and availability of credit.
They may also involve due diligence and meetings with
management.
Methodology
Our methodology is simple and transparent.
First we identified the key criteria which we believe are indicators
of the absolute and relative financial health of an airline and
which are available for every airline in the sample. Second we
apply weightings to each of these five parameters. Third, we rank
each airline on each of the parameters giving them between 1
and 8 points depending on their value for each parameter. Please
see Appendix 2. Fourth, we calculate the overall Financial Ratings
Score for each airline. The airline's "FRS" is the weighted
arithmetic average of the airline's score on each parameter. Each
FRS corresponds to a TAA Financial Rating following a scale from
AAA to CC. Please see Appendix 3.
TAA Financial Ratings are based on the most recent "Latest
Twelve Month" ("LTM") data for each airline which renders the
ratings more volatile than those of the rating agencies. This
feature may make them leading indicators of changes by the
rating agencies who may wait for a trend to be confirmed before
changing a rating. TAA Financial Ratings provide ratings for the
three most recent LTM periods so that trends in ratings are
clearly identified. Also, we compare the TAA Financial Ratings
with the public ratings from the three major rating agencies so
that differences can be seen and analysed.
Ratings Criteria
To determine the key parameters we reviewed the methodology
used by the rating agencies, the information available to us and
our own experience in the area. Consistent themes from the
rating agencies are that they place emphasis on fleet, operating
profitability / cost structure, ability to service rent and interest,
liquidity and leverage when evaluating financial risk profile. The
five criteria selected for TAA Financial Ratings are as follow:
Criteria
Average Fleet Age
EBITDAR Margin
Fixed Charge Cover
Liquidity
Leverage
Detail
Average age of operating fleet
EBITDAR/Total revenue - Earnings
before interest, tax, depreciation,
amortization and rents as a percentage
of total revenues - a measure of
operating efficiency and profitability
that is not affected by choice of
financing structures for aircraft
EBITDAR/Net interest + Aircraft rent measures the "number of times"
EBITDAR covers the sum of net interest
expense plus aircraft rent
Unrestricted cash as % of trailing
twelve months' revenues - indicates
the size of the liquidity cushion the
airline has to withstand events such as
strikes, groundings and natural
disasters
Adjusted Net Debt/EBITDAR - Balance
Sheet Debt minus Unrestricted Cash
plus capitalised aircraft operating lease
rentals divided by EBITDAR
Note that they are all tailored to the unique characteristics of the
airline industry, in particular the use of operating leases as a
major source of aircraft financing. Accordingly, we evaluate
EBITDAR rather than EBITDA margin, Fixed Charge Cover includes
aircraft rent in the denominator and Leverage incorporates net
balance sheet debt plus an adjustment for operating leases (8 x
trailing twelve months rent).
Average Fleet Age (8% weighting)
This is a key indicator of operating cost efficiency and
competitiveness as well as likely future capital expenditure. The
following is the rating scale for fleet for passenger airlines
adopted by TAA Financial Ratings. For cargo carriers we double
the age applying to each rating.
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TAA Financial Ratings Methodology - March 2013
Rating
AAA
AA
A
BBB
BB
B
CCC
CC
Average Age of Fleet
Range
< 3 years
3 - 6 years
6 - 9 years
9 - 12 years
12 - 15 years
15 - 18 years
18 - 21 years
> 21 years
Points
8
7
6
5
4
3
2
1
Fixed Charge Cover
(EBITDAR/Net Interest + Aircraft Rents)
Rating
Range
Points
AAA
> 4x
8
AA
3.5 - 4x
7
A
3.0 - 3.5x
6
BBB
2.5 - 3.0x
5
BB
2.0 - 2.5x
4
B
1.5 - 2.0x
3
CCC
1.0 - 1.5x
2
CC
< 1.0x
1
Cost Structure/Operating Profitability (23% weighting)
Liquidity (23% weighting)
The rating agencies place great store on operating efficiency and
cost structures. As it is difficult to compare airlines' cost
structures due to such factors as varying expense categorisations,
different stage lengths, differing year-ends and exchange rates
we have selected a single ratio - EBITDAR margin. EBITDAR stands
for Earnings before interest, tax, depreciation, amortization and
rents. EBITDAR margin is EBITDAR expressed as a percentage of
total revenues - a measure of operating efficiency and
profitability that is not affected by choice of financing structures
for aircraft, route structures or stage lengths. This tells the ability
of the airline, operating in its own competitive environment, to
manage its fleet, input costs and revenues to achieve operating
profitability before financing and aircraft ownership costs.
Rating
AAA
AA
A
BBB
BB
B
CCC
CC
EBITDAR Margin
(EBITDAR / Total Revenues)
Range
> 40%
35 - 40%
30 - 35%
25 - 30%
20 - 25%
15 - 20%
10 - 15%
< 10%
Points
8
7
6
5
4
3
2
1
Coverage (23% weighting)
Coverage is a key parameter assessed by the rating agencies. It is
particularly critical for airlines with their asset intensity and,
commonly, high leverage. The coverage ratio we have chosen EBITDAR divided by net interest plus aircraft rent - is one that is
neutral to choice of financing structure, approximates an
"operating cash flow" measure and is relevant to our leasing
company clients by including aircraft rent in the numerator and
denominator.
Liquidity is essential to airlines to support daily operations and to
protect against event risk such as strikes, natural disasters or
grounding of all or part of the fleet. Our assessment of liquidity is
Unrestricted Cash as a percentage of trailing twelve months'
Revenues. Mathematically, a 25% ratio is equivalent to having
three months' liquidity on hand, which is considered by many
analysts to be the minimum level for prudent management of an
airline. Note that this measure does not take into consideration
available committed lines of credit or parent or government
support as this information is not available for all airlines.
Liquidity
(Unrestricted Cash as % of LTM Revenues)
Rating
Range
Points
AAA
> 35%
8
AA
30 - 35%
7
A
25 - 30%
6
BBB
20 - 25%
5
BB
15 - 20%
4
B
10 - 15%
3
CCC
5 - 10%
2
CC
< 5%
1
Leverage (23% weighting)
Leverage is a key indicator for the rating agencies. It is the view of
The Airline Analyst that leverage measures based on book equity
are often misleading for airlines as their balance sheets may not
reflect the true value of assets such as route authorities and slots,
aircraft or the full value of liabilities like pension obligations. In
addition there are many airlines that have survived on small
slivers of equity or even negative equity for many years due to
support from shareholders or governments or by their ability to
perpetually refinance their assets. Book equity measures are also
impacted by the varying depreciation policies applied by different
airlines to aircraft.
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TAA Financial Ratings Methodology - March 2013
Leverage
(Adjusted Net Debt / EBITDAR)
Rating
Range
Points
AAA
< 1x
8
AA
1.0 - 2.0x
7
A
2.0 - 3.0x
6
BBB
3.0 - 4.0x
5
BB
4.0 - 6.0x
4
B
6.0 - 8.0x
3
CCC
8.0 - 10.0x
2
CC
> 10.0 x
1
We have therefore adopted a "cash flow" measure of leverage
that enhances comparability between airlines - Adjusted Net
Debt/EBITDAR. The debt adjustments are deduction of
Unrestricted Cash from Balance Sheet Debt and the addition of a
capitalised value for operating leases calculated as 8 times
trailing twelve month aircraft rents. We chose to use a "net"
measure to give credit to airlines which keep high levels of
liquidity on balance sheet.
Data Sources
registries and other official public sites. Average fleet age is
sourced from ATDB.aero.
Limitations
The following are several but not a complete list of limitations of
TAA Financial Ratings. Please also see the Disclaimer:





TAA Financial Ratings are measures of
intrinsic financial strength only and do not
take into account qualitative factors
Liquidity measure does not include
committed undrawn liquidity facilities or
access to a central group Treasury
Ratings do not incorporate any events post
the most recent balance sheet date
Some airlines' data may not be very recent
TAA Financial Ratings are determined based
on
rating
criteria,
weightings
and
methodology chosen by The Airline Analyst.
These may or may not be appropriate.
The analysis is based on the three most recent LTM periods for
each airline available from The Airline Analyst. In turn, that data
is sourced from airline websites and public filings at companies’
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these Terms and Conditions.
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TAA Financial Ratings Methodology - March 2013
and appropriate independent advice should be obtained from a suitably qualified independent advisor before making any such
decision.
Contact Details
Please contact us if you have any questions about the TAA Financial Ratings methodology or would like to discuss a subscription to The Airline
Analyst or TAA Financial Ratings.
For information about the rating methodology,
please contact:
For information about sales and pricing,
please contact:
Michael Duff
Managing Director
The Airline Analyst
Harry Sakhrani
Sales Manager
The Airline Analyst
Tel:
+44 7736 804460
Email:
mduff@theairlineanalyst.com
Tel:
Mob:
Email:
+44 20 7779 8203
+44 7582 729883
hsakhrani@theairlineanalyst.com
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TAA Financial Ratings Methodology - February 2013
Appendix 1 - Sample Reports
Each release of TAA Financial Ratings will comprise a PDF incorporating three primary reports:
The same report ranked from best rated to worst-rated
3)
Three years' historical data for each airline:
LTM - 2
LTM - 1
LTM
1.8
4.0
4.9
1.3
3.3
5.5
1.3
2.9
6.5
CC
BBBB+
CC
BBBB
CC
CCC+
A
0.3
0.3
1.0
0.4%
0.3%
0.4%
24.1
40.3
11.0
5
5
5
1
1
2
1
1
2
1
1
1
1
1
1
1.3
1.3
1.8
CC
CC
CC
B
B
B
30-Sep-12
30-Sep-11
30-Sep-10
4.5
4.5
4.5
8.3%
10.3%
15.7%
0.7
0.9
1.4
28.1%
28.9%
28.4%
9.8
7.8
4.8
7
7
7
1
2
3
1
1
2
6
6
6
2
3
4
2.9
3.3
4.0
CCC+
BBB-
C
C
C
30-Jun-12
30-Jun-11
30-Jun-10
7.1
7.1
7.1
14.7%
12.3%
9.7%
4.4
2.9
2.5
62.9%
58.4%
62.9%
0.8
1.7
3.8
6
6
6
2
2
1
8
5
5
8
8
8
8
7
5
6.5
5.5
4.9
A
BBB
BB+
C
C
C
Liquidity
B
B
B
Adjusted Net
Debt/EBITDAR (x)
4.3%
3.4%
11.2%
Fixed Charge Cover
9.0
9.0
9.0
Country
A
A
A
Average Age of Fleet
31-Dec-11
31-Dec-10
31-Dec-09
Airline name
A
A
A
Most Recent Twelve
Months Ending
TAA Financial Rating
LTM
1
2
8
LTM
LTM - 1
1
6
8
Leverage
LTM - 2
1
1
8
Liquidity
1
1
2
FCC
5
7
6
EBITDAR Margin
24.1
9.8
0.8
Leverage
Adjusted Net
Debt/EBITDAR (x)
Liquidity
0.4%
28.1%
62.9%
Average Age of Fleet
EBITDAR Margin (%)
2)
0.3
0.7
4.4
Liquidity
4.3%
8.3%
14.7%
FCC
9.0
4.5
7.1
Fixed Charge Cover
EBITDAR Margin (%)
Average Age of Fleet
200
854
1,789
EBITDAR Margin
31-Dec-11
30-Sep-12
30-Jun-12
Average Age of Fleet
A
BBBB+
Most Recent Twelve
Months Ending
Airline
A
B
C
LTM Revenues (USDm)
An alphabetical listing by airline of the values for their rating parameters, the points score and Financial Rating:
S&P Foreign Currency
Rating
1)
Reports 1 and 2 will also be provided in Excel format so that the airlines can be ranked and sorted by any of the ratings criteria. In addition, each release of TAA Financial ratings will include a
comparison with the public rating wherever such is available and will include a chart showing the distribution of ratings by rating level (AAA to CC).
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TAA Financial Ratings Methodology - February 2013
Appendix 2 - Ratings Criteria
The following table illustrates the number of points from 1-8 allocated based on each airline's value for each criteria. For example an airline with an average fleet age of 8 years would receive
6 points for that parameter; an airline with Adjusted Net Debt/EBITDAR of 7x would receive 3 points for that parameter.
Rating
Weighting AAA
Points
AA
A
BBB
BB
B
CCC
CC
8
7
6
5
4
3
2
1
9 - 12 years 12 - 15
years
25-30%
20-25%
2.5 - 3.0x
2.0 - 2.5x
20 - 25%
15 - 20%
3.0 - 4.0x
4.0 - 6.0x
15 - 18
years
15-20%
1.5 - 2.0x
10 - 15%
6.0 - 8.0x
18 - 21
years
10-15%
1.0 - 1.5x
5 - 10%
8.0 - 10.0x
> 21 years
Average Age of Fleet
8%
< 3 years
3 - 6 years
6 - 9 years
EBITDAR Margin
Fixed Charge Cover
Liquidity as % of Revenue
Adjusted Net Debt / EBITDAR
23%
23%
23%
23%
> 40%
> 4x
> 35%
< 1x
35-40%
3.5 - 4.0x
30 - 35%
1.0 - 2.0x
30-35%
3.0 - 3.5x
25 - 30%
2.0 - 3.0x
< 10%
< 1x
< 5%
> 10.0 x
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TAA Financial Ratings Methodology - February 2013
Appendix 3 - Ratings Process - "Air Global" Example
The following chart shows the number of points awarded for "Air Global" on each of the criteria, the weighting of the score and the mapping of the overall Financial Ratings Score to a TAA Financial
Rating, in this case BB.
Apply Scores Based on Rating
Scales for Each Individual
=
Apply Weighting
Calculate
=
6
2
5
5
6
x
x
x
x
x
8%
23%
23%
23%
23%
0.48
0.46
1.15
1.15
1.38
Overall Financial Rating
Score
3.0
Financial
Rating
Mapping
Adjusted Net Debt/EBITDAR
23.0%
Liquidity
2.9
Fixed Charge Cover
Adjusted Net Debt/EBITDAR
(x)
14.8%
EBITDAR Margin
Liquidity
8.9
Average Age of Fleet
Fixed Charge Cover
Scores
EBITDAR Margin (%)
Air Global
Ratings Criteria
Average Age of Fleet
Airline
4.62
Map to Overall
Financial Rating
8.0
7.67 - 7.99
7.33 - 7.67
7.00 - 7.33
6.67 - 6.99
6.33 - 6.67
6.00 - 6.33
5.67 - 5.99
5.33 - 5.67
5.00 - 5.33
4.67 - 4.99
4.33 - 4.67
4.00 - 4.33
3.67 - 3.99
3.33 - 3.67
3.00 - 3.33
2.67 - 2.99
2.33 - 2.67
2.00 - 2.33
< 2.0
AAA
AA+
AA
AAA+
A
ABBB+
BBB
BBBBB+
BB
BBB+
B
BCCC+
CCC
CCCCC
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